There can be no other reason for the world’s three largest container lines — Maersk Line, Mediterranean Shipping Co. and CMA CGM — for taking the dramatic step of proposing their uber-alliance than this: The industry is in dire condition no matter how you look at it and not a lot on the horizon suggests a turnaround any time soon. The scale of the action is commensurate with the enormity of the problem.
Of course, the most direct route out of the abyss of near-zero profitability over multiple years is higher rates. But that route is blocked; other than carriers rallying around sporadic, massive general rate increases, which, though momentarily successful, consistently erode in subsequent weeks, or the occasional, unanticipated capacity squeeze like in early 2010, the carriers have no ability to increase rates in any sustained manner.
The trends are working against them: Europe in a morass lasting who-knows-how-long, outsourcing having run its course, China slowing, big ships arriving and more on the way. And no White Knight is coming to the rescue; the industry’s stubborn inability to consolidate, its structural inability to match supply with demand and the absence of pricing discipline within the ranks all stand in the way of any realistic hope of sustained profitability.
So the big carriers are trying something else, the uber-alliance. Though its ultimate goal is to restore health to the industry, it’s also a circuitous path that may never lead to the promised land in the form of at least semi-regular profits and a moderation of cyclicality — a distant dream in today’s world.
As an example of just how distant that concept is, consider that market share in the Asia-Europe trade has never been as concentrated as it is today — the P3 carriers control roughly half of that market — and yet, as Maersk CEO Soren Skou remarked this month, the most recent rate collapse in the Asia-Europe market is “probably the fastest rate drop we have ever seen.”
If concentrated market share won’t create the pricing environment carriers desire, will a true, comprehensive alliance among the top three carriers, involving, in this case, 255 vessels across all of the major east-west trades? Although it’s possible to reason out how such an alliance could foster stability, there’s no indication that alliances have fostered such stability in the past.
An alliance is, as it has been since the first ones were formed in the 1970s, an operational arrangement to share vessels to extend the service scope of the participating carriers and to rationalize terminals and sometimes equipment. Pricing doesn’t enter the picture. If it did, carriers’ results would be different.
Indeed, whether the space a carrier must fill is on its own ships or that of an alliance partner, is there any less urgency to fill the space? Does a carrier lose any less market share by not dropping its rate and seeing the business go to a competitor? The answer is no. As Jefferies’ Johnson Leung noted in reaction to the P3 last week, “We expect no reduction to the competitive nature of the industry from these alliance formations.”
The underlying competition that exists among carriers with or without alliances may be why the three carriers were confident enough to announce the P3 knowing they still need regulatory approval. Thus, the bet is that the regulators, particularly the European Commission, will give their blessing and that the alliance will, over time and in more subtle and entirely legal ways, begin nudging the industry toward more balanced supply and demand.
That could play out, for example, through a continuing moderation in the pace of vessel ordering. If ships must be ordered to meet the requirements of an alliance deployment, fewer ships may get ordered. It’s been reported, for example, that the five 18,000-TEU ships that China Shipping and United Arab Shipping ordered recently would conveniently make up an Asia-Europe string if their alliance is confirmed. Compare that with Maersk’s order for 20 18,000-TEU Triple E ships, which now will get folded into the P3.
But achieving true, lasting efficiencies within an alliance isn’t easy. Alliances are like marriages, requiring perpetual give and take and not just on trivial matters. Port calls must be unanimously agreed upon, and they almost always favor one partner over another. Maersk, CMA CGM and MSC achieved their respective dominant positions on their own, led by forceful, empire-building owner/CEOs in the mold of Dirk Straun in James Clavell’s Tai-Pan.
Though they’ve dabbled in alliances, it’s not part of their culture like it is for the carriers of the G6, for example, which have lived the good and bad of alliances for many years. Ultimately, that’s the real news in the P3 announcement; the big guys will no longer be the daring Hawaiian surfers riding the wave of expanding global trade. Rather, they’ll ease into a more conservative posture, befitting a more modest outlook, a less promising future.